JETSET asked:
In every economics class I’ve ever taken the classic answer to every pricing question is “it’s supply and demand”. Can anyone explain to me how on earth gas prices can continue to skyrocket when U.S. demand is on the biggest decline in the last 30 years. Don’t tell me that China is the one driving it. I’m not buying the fact that a third world country can afford these prices when we can’t! P.S. Why is there not a REVOLT against these prices like a don’t buy gas week?
I think your teacher should have told you this: the law of supply and demand isn’t so simple. Gas prices are skyrocketing for a number of reasons, demand is one of them, but so is conflict in the ME and the weak dollar. (And demand for oil *isn’t* on a decline – oil is a good for which there will always be a short-term demand.)
By the way – I can’t believe you just dismissed China’s power like that. Get used to it: China is going to be an economic monster. US manufacturing jobs are being outsourced to where? China. Everything is going to be made in China – deregulation of labor makes it a very attractive place for business owners.
Why isn’t there a revolt? Because the country can’t function without buying gas for a week. Back in 1973 they had a “blackout” day, but presently it would be just short of impossible. How would the post office deliver the mail? How would food get shipped from one place to another? How would public transportation work? / Etc.
Comment by Pazit — July 2, 2005 @ 9:18 pm
because, for the last 10 or so years, US demand has increased massively due to people who bought gas hogs when gas was cheap.
china’s middle class is rapidly growing, and that’s increasing their demand…not everyone there is dirt poor….also they’re closer to the middle east, they tax differently, and the price of oil is quoted in dollars and their currency has been rising against the dollar….it’s a lot more complicated than you make it seem
some people try the don’t buy gas for a small amount of time but nobody participates because they don’t work, if you don’t buy it this week you’ll just end up buying it next week. if you really want to protest against gas prices, stop driving altogether.
Comment by Anad — July 4, 2005 @ 2:32 am
Gasoline is an INELASTIC good meaning that the law of supply and demand doesn’t apply to it. People will still buy it no matter how much the price goes up. Sucks I know :(
Comment by necrodude77 — July 4, 2005 @ 3:21 am
OPEC restricts supply of crude oil to maintain and raise prices.
I don’t know where you got the supposed fact that U.S. demand is on the biggest decline in the last 30 years. You should document the source in your details.
And to say the U.S. isn’t demanding oil enough to support the current price is contradictory. If the demand isn’t strong enough, then why would the retail gas firms keep prices where they are. They wouldn’t because if your premise is true, American’s don’t demand gas enough to buy at this price meaning they wouldn’t buy gas. The retail gas firms would have to lower prices or just not sell gas. Since they are though, I don’t think your premise is true.
Basically, you are insinuating that there is some conspiracy holding gas prices high. Holding gas prices high with a lack of demand is not profitable. Why would any retail gas firm do something like this?
By the way, when Necrodude said inelastic products aren’t held the the Law of Supply and Demand, he was flat out incorrect. No matter what a product’s elasticity, it is still bound by the laws of supply and demand.
Comment by srjcstud — July 4, 2005 @ 9:13 am
The law of supply and demand is actually working. Take into consideration the following facts.
supply side: There are not enough new oil rigs to increase supply in the near future. no matter what the price would be.
demand side: The total world demand for oil is increasing steadily. In the U.S. it is also increasing but not asmuch as before.
Comment by ik — July 6, 2005 @ 9:16 pm
The short and honest answer is that the law of supply and demand is a myth.
Free market economics presumes a fully informed market in which everybody has perfect knowledge, and where nobody conceals information, forms associations or uses any other methods of manipulating their market.
An ideal system for an ideal world, but an unreal system for the real world.
Revolt against whom. The oil companies act as a cartel (they set the price, not OPEC) and they have you by the short curly hairs of your bags.
You can rebel all you want, but if you want transportation, heat and hydro as well as clothes and food you will have to pay them.
Comment by BRP — July 8, 2005 @ 10:48 am
China uses about i/3 the oil the US does but just a few years ago it was much less. Increase in world demand combined with almost no increase in supply means that the price will be bid up enough to make some people conserve and price others out of the market. Since gas was not the major cost of car ownership until recently this requires a large increase in the price. There are 22 million private cars in China and their owners are rich enough to compete with the 140 million Americans that own cars for the available gas.
Comment by meg — July 10, 2005 @ 11:52 pm